Banking: When (and How) to Borrow

It often seems that entrepreneurs have little or no control over their borrowing relationships. One way to improve that balance of power is by learning to recognize when loan officers may believe it's the right time for your company to borrow funds.

Penn Ritter, a senior vice-president at Business Lenders, a nonbank Small Business Administration lender in Hartford, Conn., urges business owners to watch for two key indicators:

1. Are you having a tough time paying your bills? Believe it or not, "that can be a good time to borrow money," Ritter says, " if you can use it to pay off creditors and improve cash flow."

The trick to qualifying for a loan at this juncture is being able to demonstrate to a lender that your sales and your market potential are strong, and that by restructuring debt, you'll achieve quantifiable monthly savings and you'll be able to reestablish cash flow on a solid footing (in other words, comfortably pay the loan back). "Be prepared for an in-depth discussion to help the loan officer agree with your assessment of the need and strategy for restructuring," Ritter advises.

2. Are you missing out on growth opportunities because you lack the cash to add inventory, equipment, or employees? "A shrewd lender will see this situation as a 'mini start-up' within a mature company," says Ritter. "What you'll need to be able to demonstrate is that cash flow, although it is steady, can't support new growth. Anything you can include in your pitch to demonstrate that -- maybe an expanded marketing plan or, better still, a preliminary contract for a big order -- should help."